This column often focuses on the UK’s national accounts – with good reason. Britain’s public finances are in a parlous state, teetering on the brink of systemic meltdown.
In 1997, when Tony Blair took office, the economy was growing at a rate of 4.9pc a year and the national debt was 36pc of GDP – low by historic standards. Growth continued at 3-4pc per annum for the rest of that parliament – so a relatively small government debt pile remained manageable as a share of total output, allowing the state to borrow and spend more.
Keir Starmer’s incoming administration faced a different situation. Over the previous 14 years, the Tories had overseen a decade of tough fiscal rhetoric during which the national debt actually ballooned, followed by a wildly over-stringent Covid lockdown that weakened our public finances even more.
As a result, Labour entered government last July with Britain in a high-debt, high-tax, low-growth doom loop – with growth at a historically paltry 1.1pc and national debt near 100pc of GDP, a 60-year high.
But Starmer and Chancellor Rachel Reeves, leading a government far more ideologically Left-wing than the Blairites, doubled down. Last October’s Budget raised taxes by another £40bn a year so Reeves could jack up spending even more, not least by awarding sweetheart pay-deals to Labour’s public-sector union paymasters.
This strategy has proved disastrous, as some of us warned from the outset. Government borrowing costs have soared, with the 10-year gilt yield up from 3.7pc in mid-September to 4.5pc now – consistently way higher than during the “mini-Budget crisis” of October 2022 which saw Liz Truss drummed out of No 10.
The pension funds and insurance companies that lend governments serious money are spooked because, far from picking up under Labour, growth has slumped with Britain now probably in recession. Investors judge that a faltering, heavily over-taxed UK economy will struggle to raise the revenues ministers hope for, while Labour lacks the political grit to rein spending in.
The market consensus is Starmer’s Government will keep borrowing and spending even more, raising tax rates ever higher in a desperate bid to plug the gap, driving the economy ever deeper into the doldrums, making our fiscal position even worse.
That’s why gilt yields remain stubbornly high, forcing the Government to spend evermore billions on debt interest each month, despite the Bank of England repeatedly cutting its base rate in a bid to lower economy-wide borrowing costs. The UK’s national debt looks set to soar above 100pc of GDP – which will unnerve financial markets even more.
Yet, as tough as the fiscal outlook appears, the underlying reality is worse. Britain’s headline national debt figure is actually a serious under-estimate of the Government’s true debt burden.
Official public sector net debt (PSND) is £2,674bn on the latest 2023/24 data – equivalent to 98pc of GDP. That’s sharply up from 80pc of national output prior to lockdown and less than 40pc just before the 2008 global financial crisis.
This figure, though, is way lower than it should be if you include additional liabilities under three headings: the Bank of England’s asset purchase facility (APF); contractual debts accrued under the private finance initiative (PFI); and, the really big one, mammoth state obligations represented by the still very generous, inflation-proofed pensions enjoyed by millions of public sector workers.
As a result of the APF, the Office for National Statistics (ONS) makes a huge multi-billion-pound deduction from official national debt attributed to “The Bank of England” in our national accounts. This, in my view, is entirely unjustified.
In reality, the Bank is sitting on big losses as a result of its quantitative easing (QE) programme, under which the central bank bought hundreds of billions of pounds of mainly sovereign debt in a bid to boost the economy over the last decade or so. The value of those assets has since fallen. Yet instead of adding those losses to the national debt, the ONS – in a strange metaphysical twist – subtracts them from the UK’s headline debt figure.
“As well as being unjustified, this deduction is dangerous in that it normalises the routine understating of the nation’s indebtedness,” says Bob Lyddon of Lyddon Consulting, a highly-respected economic consultancy specialising in the scrutiny of bank balance sheets. “Such creative accounting leads only to one place: the invention of illusory headroom for further public sector borrowing”. If APF liabilities are added, the headline PSND figure, rises by £179bn to £2,853bn – from 98pc to 105pc of GDP.
To that should also be added the huge liabilities that are still outstanding under hundreds of PFI contracts, a trend which began under John Major’s Conservatives before accelerating sharply under Blair. PFI was used to disingenuously keep public investment off the state balance sheet by relying on private capital instead, with investors guaranteed huge, taxpayer-backed returns for years to come.
Often what was delivered under these contracts were extremely shoddy schools, hospitals and other public infrastructure. Add in £94bn of PFI liabilities, all of which must be legally met by the state over the coming years, and our national debt climbs further to £2,947bn, or 108pc of GDP.
Then there is the often-ignored bill for the very large, index-linked pensions due to civil servants, NHS staff, teachers and some other state workers – paid for not out of invested funds, but current and future tax receipts. That bill, officially estimated at £1,442bn but according to many experts much higher, takes the national debt to £4,389bn – an astonishing 161pc of GDP, two thirds above the headline figure.
The UK’s national accounts are a morass of statistical cons and tricks designed to make our national debt look smaller than it is – a culture Chancellor Reeves has embraced.
It’s no way to run a serious country. No wonder serious financial analysts, and the bond traders they advise, increasingly view Britain as a joke.
Statistical skulduggery is turning Britain into a joke
The national accounts are full of cons and tricks – it’s no wonder investors don’t take us seriously